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On Our Radar

U.S. Government Bonds Pull Back

U.S. government bonds pulled back Wednesday as President Donald Trump and Democratic leaders said they had agreed on a short-term extension of the federal government's borrowing limit as part of a Hurricane Harvey aid bill.

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The yield on the benchmark 10-year Treasury note settled at 2.108%, compared with 2.072% Tuesday, which was its lowest close since Nov. 9. Yields rise while bond prices fall.

Under an agreement reached at the White House, lawmakers would extend both the debt limit and government funding until Dec. 15, while providing an initial installment of aid to Harvey victims.

Though it still isn't certain that Congress will pass the measure, the apparent progress led investors to pull cash out of assets that have previously benefited from the threat of either a debt ceiling breach or a government shutdown.

Along with bonds, gold prices also fell, while the Japanese yen weakened against the U.S. dollar. At the same time, four-week Treasury bills rallied, reflecting better odds that holders would be paid on schedule.

Despite the increase Wednesday, the yield on the 10-year note is still much lower than most analysts projected at the start of the year, when it stood at around 2.5%.

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Now just a "chip shot away" from 2%, the yield could easily drop below that level, though it would be difficult to hold there without an event that hurts the economy "rather than simply fears of things," said Michael Cloherty, head of U.S. interest-rate strategy at RBC Capital Markets.

Treasurys have been bolstered this year by a surprising run of soft inflation data, which has come despite a tightening U.S. labor market and signs of improvement in the global economy.

Low inflation makes Treasurys more attractive because it helps preserve the purchasing power of their fixed payments and makes it less likely that the Federal Reserve will raise interest rates.

Federal-funds futures, used by investors to place bets on the Fed's rate-policy outlook, on Wednesday showed a roughly 37% chance that the central bank, which has raised rates twice this year, will raise rates again by December, according to CME Group data. It was 47% a month ago.